Updated on April 1st, 2019 by Nathan Parsh
San Juan Basin Royalty Trust (SJT) has a high dividend yield over 7%, based on its annualized distributions over the past 3 months. It is one of the highest-yielding stocks with a 5%+ dividend yield.
SJT has a very enticing payout, considering the S&P 500 Index has a 1.9% dividend yield right now. That means SJT offers four times as much dividend income as the average stock in the S&P 500.
SJT also pays its dividend each month, rather than each quarter like most other stocks. This gives investors the benefit of slightly faster compounding, for those who reinvest dividends.
SJT is one of only ~40 monthly dividend stocks. You can download the full list of monthly dividend stocks from our database below:
However, SJT’s dividend may not be as attractive as it seems.
This article will discuss why investors should view royalty trusts like SJT with a fair dose of skepticism.
SJT is a royalty trust, established in November 1980. The trust is entitled to a 75% royalty interest in various oil and gas properties across over 150,000 gross acres, in the San Juan Basin of northwestern New Mexico.
On July 31st, 2017 Hilcorp San Juan LP completed its purchase of San Juan Basin assets from Burlington Resources Oil & Gas Company LP, a subsidiary of ConocoPhillips (COP).
More than 90% of the trust’s production is comprised of gas, with the remainder consisting of oil.
The trust does not have a specified termination date. It will terminate if royalty income falls below $1,000,000 per year over any consecutive two-year period.
2015 and 2016 were very difficult years for SJT. Not surprisingly, this was due to lower oil and gas prices.
Natural gas fell from an average of $2.60 per Mcf in 2015, to $1.89 per Mcf in 2016. In 2017, the average price of natural gas per Mcf improved 42% to $2.68.
The average price for oil declined from an average of $47.00 per barrel in 2015, to just $30.01 per barrel in 2016. The average price per barrel of oil rebounded more than 21% the following year.
Fortunately for SJT, oil prices have recovered in the past year. In 2018, the average price of oil improved 46% to $52.23 per barrel.
Natural gas production improved 26% in 2018. SJT had proved oil reserves of approximately 257 million barrels of oil. This was 37% higher than the previous year.
The trust’s financial situation has improved as the price of natural gas and oil recovered.
However, in 2018, the price of natural gas collapsed, leading to a drastic cut in royalty income per unit.
The average price of natural gas fell almost 30% to $1.89 per Mcf in last year. This led to a 42% decline in royalty income. Higher expenses caused distributable income to drop by 54%.
There are two significant growth catalysts for SJT moving forward. The first is higher commodity prices, which would help SJT generate higher cash flows.
Specifically, higher gas prices would be a huge boost for SJT, since gas accounts for the vast majority of production.
The other major growth catalyst for SJT would be, if the trust’s oil and gas properties produced for longer than is currently expected.
SJT is not exactly sure of the lifespan of the trust. It has hired independent petroleum engineers, who conservatively estimated that the trust is likely to continue to produce for least another 10-15 years.
These two factors will determine whether SJT is a good investment.
The trust is not permitted to engage in any business activity, which includes using any portion of the trust estate to acquire additional properties.
If the trust lasts 10-15 years, at the 2018 distribution rate of $0.385678 per unit, investors would receive approximately $3.86-$5.79 per unit in distributions. It should be noted that SJT did not distribute a dividend to unit holders in September due to excess capital expenditures.
This does not appear to be a common occurrence for SJT, but a reminder that dividends are not a guarantee from the trust. In fact, the trust’s royalty income declined 23% through the first three quarters of 2018.
Aside from higher commodity prices, SJT received a boost from its July 2014 lawsuit against Burlington. SJT claimed a breach of contract, and was seeking in excess of $12 million. SJT claims Burlington failed to pay certain royalty interests to the trust.
In September 2017, SJT received $7.5 million in settlement and distributed the proceeds to share holders the following October.
Royalty trusts like SJT are essentially bets on commodity prices, which will be the major determining factor as to whether the dividend is sustainable.
As a trust, SJT’s dividends are classified as royalty income. Distributions are considered ordinary income, and are taxed at the individual’s marginal tax rate.
Since oil prices are so important to royalty trusts’ cash flow, it is no surprise that SJT’s dividends have declined from 2014 to 2016.
SJT made the following distributions since the previous oil and gas industry downturn:
- 2014 distributions-per-share of $1.284587
- 2015 distributions-per-share of $0.364745
- 2016 distributions-per-share of $0.298851
- 2017 distributions-per-share of $0.839547
- 2018 distributions-per-share of $0.385678
Despite an uptick in distributions in 2017, declining commodity prices caused SJT’s fundamentals to deteriorate since 2014. This, in turn, led to lower dividend payments.
So far in 2019, SJT has paid unit holders $0.108767 in dividends through the end of March. At this rate, SJT would pay out approximately $0.435 per unit for the full year.
This payout level would represent a yield of 7.6% based on the current unit price of $5.52.
As a result, if oil and gas prices can maintain current levels or continue to recover, SJT’s dividends could increase to a level that makes the stock attractive.
For example, if the trust lasts another 10 years, investors will want a dividend yield well in excess of 10% annually, to make SJT a successful investment.
Investing in SJT right now is essentially making a bet on two things—higher oil and gas prices, and a longer-than-expected lifespan of the trust.
Royalty trusts can be a good source of dividend income because of their high yields. But investors need to make sure the trust’s assets will not run out before the initial investment is paid back.
It appears that SJT investors will need a significantly higher price of natural gas and oil in order to make the stock a good investment.
If energy prices were to collapse again, SJT’s distributions would likely suffer another steep decline. Investors looking for less risk from a dividend stock are encouraged to avoid royalty trusts like SJT.